UK finance watchdog warns EU against 'disrupting' fund industry

Fund managers are facing increased scrutiny from European regulators, particularly on their use of 'delegation' to outsource activities to companies based outside the EU – which would include the UK come 2019.

18.10.2017

The UK's finance watchdog has warned the European Union against "disrupting" or "weakening" the investment management industry by tightening the rules on
'delegation' as Britain leaves the trading bloc.

Fund
managers are facing increased scrutiny from European regulators, particularly on their use of 'delegation' to outsource activities to
companies based outside the EU – which would include the UK come
2019.

"Let’s
not beat about the bush, this model works – it works well for
investors and for investment managers. So, why disrupt it, or put
another way, must it be disrupted?" Financial Conduct Authority
Chief Executive Andrew Bailey said in a speech on Tuesday evening at the Investment Association's annual dinner.

Investment
managers in the UK manage just over £1 trillion (€1.1 trillion) on
behalf of overseas authorised funds, of which over 80% are domiciled
in either Luxembourg or Dublin.

"As
my fellow-regulator in Luxembourg suggested last week, EU rules on
delegation arrangements are already strict and no further
strengthening of them is necessary. This is a commendable statement,"
Bailey argued.

"Of
course it will be criticised by others, as will everything I say, as
a product of self-interest. Actually, what we have done is to help to
put into effect, with firms, a system that serves the public
interest. Does it require membership of the EU to make this system
work? No it does not."

The 'delegation' model attracted the attention of ESMA in July when it issued guidance on investment fund relocations from the UK.

This guidance warned against the creation of so-called "letterbox entities" through excessive delegation and conferred "strict conditions" on outsourcing to third countries located outside the EU.

The European Commission then put forward a proposal in September to
grant greater powers over cross-border finance to the European Securities and Market Authority (ESMA), including monitoring financial firms' use of delegation.

"Brexit
is, of course, a challenge,” Bailey added. "But it is important
that we are very robust in supporting what works today, and in doing
so rejecting the case that Brexit must mean a weaker European
investment management sector because there is a failure of the
imagination required to preserve and develop what works today."